Your credit score: It matter$

credit score


Most of us don’t spend much time thinking about our credit score. But a low score can negatively impact your finances and have a big effect on the choices you may be able to make in your day-to-day life. Fortunately, there are several things you can do to improve your score. 

What is a credit score?

A credit score, or FICO score, is a three-digit number used by lenders and companies (usually a range of 300-850) to assess how likely you are to pay down your debts in a timely way. Different industries use different scoring models, but generally, the FICO score depends on the following factors:

Score Component   Weight 
Payment History  35% 
Amounts Owed  30% 
Length of Credit History  15% 
New Credit  10% 
Types of Credit Used  10% 

The recency, frequency, and severity of your credit activity also have an impact.

Why does it matter?

Essentially, lenders want to be paid back, so the better your credit history, the more attractive you are as a loan customer.

Many companies pay attention to your score. Your score can be the deciding factor in whether you’ll be approved for a mortgage, car loan, credit card, or other loan. It could prevent you from getting the credit you need or may force you to rely on payday loans or other very high-interest, high-fee loans.

Your credit history is not only important to lenders, it’s important to banks, utility companies, insurance companies, government agencies, landlords, and even prospective employers in their decision to hire you for a job. It can even impact whether you get approved for a cell phone plan.

The higher your score, the less interest you’re likely to pay. Improving your score can help you qualify for the best loan rates and terms and has a significant financial impact. For example, using the FICO loan savings calculator in June 2017, a person with a 30-year, $200,000 fixed interest mortgage and a 620 credit score would pay $195,226 in interest over the life of the loan. But someone with a 760 score would pay a total interest of $127,668. That low credit score would cost the first person $67,558 more—enough to start a business, put a kid through college, or retire a year earlier.

It could affect where you live. If you’re in the market for an apartment, your score can impact the odds of getting approved, the size of your security deposit, and how much you pay in fees.

It can affect insurance rates. Insurance companies use insurance scoring to determine your eligibility for coverage and what your premiums will be. It takes into account many aspects of your credit report, among other things, to predict the likelihood of future insurance losses. While you’re not automatically disqualified if you have a low score, it can negatively impact your rates.

It can affect student loans. Federal Stafford and Perkins loans are available without regard to your credit history. And as long as you don’t have an adverse credit history, you may qualify for the PLUS loan (visit studentaid.gov, “Direct PLUS Loans and Adverse Credit,” for more information).

However, private student loans are affected by your credit score. Most education lenders break their interest rates and fees into five tiers, with each tier 1% or 2% higher than the previous tier, so borrowers with the worst scores may have interest rates 5% to 6% higher than those with excellent credit. This translates into monthly payments that are 20% to 40% higher and two-thirds to 100% more interest paid over the lifetime of the loan (source: finaid.org).

If you find yourself with poor credit, you can help yourself by:

  • Making payments on the loan while in school, which may help you get better rates.
  • Appealing if you’re denied a loan. Sometimes they will make an exception if you have an unusual circumstance or your credit report was inaccurate.

Paying your student loans back in full and on time will boost your credit score, so make sure to budget for it after you graduate. If your lender reports late student loan payments to the credit bureaus, it stays on your credit report for seven years. Being consistent with your payments each month will show lenders they can trust you to handle money responsibly.

Keep in mind that defaulting on loans may make you ineligible for future financial aid or student loan forgiveness and may cost you your right to defer payments. Deferring loans, while not ideal, won’t hurt your credit score (but you will still be charged interest on the loan).


Lenders want to be paid back, so the better your credit history, the more attractive you are as a loan customer.


How to monitor your credit

Check your credit reports regularly. A credit report is a record of your credit history and includes information on your identity, existing credit, public record (court judgements, tax liens, etc.), and inquiries about you from companies or other people. It does not include your FICO score. You can get free credit reports once a year from TransUnion, Experian, and Equifax by visiting annualcreditreport.com. Get them all at once or request one report every four months—it won’t affect your FICO score to check.

The FICO Score Open Access program, launched in 2013, has made getting your three-digit FICO score easier. A growing number of financial institutions offer free FICO scores. Check with your current credit card statement and your bank but keep in mind it may not be the exact score used by anyone evaluating your credit application. This is because card issuers get FICO scores from different credit bureaus, and each bureau collects and formulates data differently.

Other ways to get your score, according to the Consumer Financial Protection Bureau, include:

  • Talking to a nonprofit credit counselor.
  • Using a credit score service. Some are funded through ads and may not charge a fee while others may require you to sign up for a “free” trial. Be sure you know what you’re signing up for and the actual cost.
  • Buying your actual credit score at myfico.com. (You’re not obligated to buy other services that may be offered like credit protection, identity theft monitoring, etc.)

How can you improve your score?

Every inquiry for a loan has the potential to reduce your credit score, so it’s best to keep the number of inquiries small and within a short time period—credit reporting agencies typically allow a certain window of time to treat multiple inquiries as one.

According to myFICO, other things you can do to improve your score include:

  • Paying all your bills on time. If you’ve missed payments, get current and stay current—the longer you pay on time, the more your FICO scores should increase.
  • Keep your balances as low as possible. It can help to create a budget with a payment plan to decrease and manage your debt. Use our budget worksheet.
  • Re-establish your credit history if you’ve had problems by opening new accounts responsibly and paying them on time.

If you’re feeling stuck, consider hiring a credit counselor, who can work with both you and your lenders to find fair resolutions. Many lenders are open to this because they receive at least some of their money back in a timely fashion.

Remember, as your credit information changes, your score changes...so the efforts you make to pay off debt or correct your credit report now can make a big financial difference to you later on.

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